Statement at the Conclusion of the 2010 Article IV Consultation Mission to the Philippines

Press Release No. 10/483
December 10, 2010

An International Monetary Fund (IMF) mission led by Mr. Vivek Arora visited Manila December 1 to 10 to conduct the 2010 Article IV Consultations. At the end of the visit, Mr. Vivek Arora issued the following statement on December. 10, 2010 at the conclusion.

“The Philippines has emerged well from the global financial crisis. The government’s effective policy response, as well as strong external liquidity and a sound financial sector, helped to cushion the economy against the global downturn and foster a strong recovery. The government’s focus on governance and investment has engendered high investor confidence and improved growth prospects. The key challenge going forward is to sustain the recovery and strengthen the pace and quality of sustainable growth. Doing so will require preserving macroeconomic stability by carefully managing the exit from crisis-related stimulus policies in an environment that is complicated by large capital inflows and a fragile global recovery, and moving ahead with reforms to enhance growth.

“The near-term outlook is favorable and the staff team expects growth to average 7 percent in 2010 and 5 percent in 2011. Inflation is expected to remain within the target range this year and next, and the balance of payments to stay in surplus. The fragile global economic environment remains a key risk to the outlook. In addition, rising capital inflows need to be carefully managed in order to avoid asset-price inflation and macroeconomic volatility.

“Monetary policy has played a helpful role in keeping inflation low while fostering the recovery. As the recovery got under way, the Bangko Sentralng Pilipinas (BSP) appropriately started to unwind its crisis-related liquidity support measures. With the narrowing output gap, it may be necessary to start normalizing the policy stance in the near term in order to forestall excess liquidity and inflation pressures. If the global environment were to worsen, or other downside risks materialize, the pace of policy normalization could be adjusted.

“The government’s efforts toward fiscal consolidation should help to provide the budget with more space to respond effectively to future shocks. The authorities’ emphasis on strengthening tax administration is welcome and the Fund is committed to supporting these efforts with technical assistance. In addition, it will be important to rationalize fiscal incentives, address tax distortions, and reform excises. The 2011 budget appropriately reorients spending toward social sectors.

“The financial sector has remained resilient, owing in large part to the strengthening of the supervisory and regulatory framework in recent years. Nonperforming loan ratios are relatively low and capital adequacy high. Banks have been not much affected by the global financial turbulence in recent quarters. In order to further strengthen bank supervision and regulation, it is important that amendments to the BSP Charter be quickly approved that would give supervisors stronger legal protection as well as allow the BSP to issue its own debt securities for more effective conduct of monetary policy and promotion of macroeconomic stability.”